Posts about Debt

Welcome to Harney Friday!! Our real estate expert in Washington sheds light on a controversial issue that impacts people who have FHA mortgages.

By KENNETH R. HARNEY

WASHINGTON -- Could the federal government's booming FHA mortgage program be forcing homeowners to pay tens of millions of dollars of extra interest charges when they sell their houses or refinance their loans?
Critics say yes. The government says the critics aren't providing the full picture.
Those critics include Sen. Ben Cardin, D-Md., who is sponsoring new legislation that would prohibit FHA lenders from collecting a full month's worth of interest from sellers and refinancers who pay off their mortgages -- go to settlement -- before the final day of the month.
No other major source of financing -- not Fannie Mae, Freddie Mac or even the VA -- requires interest payments from borrowers beyond the date they pay off their loans. On an FHA loan, however, if you sell your house and go to closing early in the month, you are charged interest through the rest of the month.
To illustrate: Say you pay off a $200,000 FHA-insured mortgage on the fifth day of April. You'll be charged an extra $820 to cover interest for the remaining days of the month, according to estimates prepared by the National Association of Realtors, which supports Cardin's bill. If you pay off the same loan on April 15, the additional interest levy would total $492.
Where does the money go? Ted Tozer, president of the Government National Mortgage Association, which bundles FHA loans into bonds and sells them to investors, says it flows to the bondholders, who are guaranteed payment of interest for the full month even if the balance is paid off much earlier.
Tozer maintains that the direct payment approach has afforded FHA borrowers a slight discount on their initial interest rates -- probably in the range of 0.10 percent to 0.15 percent, compared with conventional loans.
But critics charge that the extra interest taken from FHA sellers and refinancers exerts a far greater personal economic impact -- often cutting their proceeds by hundreds of dollars -- than the barely perceptible rate break they received on the mortgage itself.
"This is an issue of fairness," says Cardin. "Homeowners should not have to pay interest on loans that they have fully repaid." His bill, the Reduce Excessive Payments Act, would prohibit the practice and require FHA lenders to compute payoffs on a per-diem basis rather than a full-month basis.
Real estate agents are especially critical of FHA's interest prepayment policy because they say it squeezes money out of sellers who have little or no control over the timing of their closing transaction. Many have no idea of the FHA's requirement, realty agents say, but even if they do, the buyers of their houses generally are in a better position to control the date of settlement since they are dealing directly with title and escrow companies.
The National Association of Realtors says the out-of-pocket costs to unwary consumers are huge. Citing the most recent statistics on early payoffs it claims it could obtain from FHA, the group says that during the year 2003 alone:
-- FHA borrowers paid $587.4 million in "excess interest fees" because of the full-month rule.
-- Only 16 percent of loans were prepaid during the final five days of the month.
-- The average "excess interest" payment from borrowers to lenders and investors was $528, but 425,000 homeowners paid an average $622 in extra fees.
Between January 2000 and January 2004, according to the Realtors' analysis of FHA data, borrowers paid more than $1.375 billion in excessive interest. The corresponding amounts today could be significantly higher since FHA has a much larger market share.
Asked for comment, Vicki Bott, who heads FHA's single-family mortgage office, acknowledged the controversy, and said that the agency is "examining this issue very closely" and actively considering a regulatory change.
In an interview, Tozer said the entire issue is up to FHA, and that his agency could readily sell its mortgage-backed bonds using the per-diem payoff approach that is standard in the conventional mortgage marketplace. But investors would still need to be compensated for the full month's worth of interest, he said, and that would probably require a slightly higher rate on the mortgage.
Where's this headed? With pressure coming from Congress -- notably from an influential Democrat who tends to be supportive of the Obama administration's policies -- FHA may move off its disputed practice.
In the meantime: If you have an FHA loan and plan to refinance or sell your house, try hard to schedule the closing at the end of the month. You could save a bundle.

With hundreds of thousands of homeowners having negotiated loan modifications or short sales or been foreclosed upon during the past year, the Internal Revenue Service has issued fresh guidance on how to handle canceled mortgage debt in the upcoming tax season.

It's a huge issue, widely misunderstood by consumers, and involves potentially billions of dollars of tax liability. When most debts are canceled by a creditor, such as unpaid balances on student loans or credit cards, the forgiven amounts are treated as ordinary, taxable income by the Internal Revenue Code. But under a special exemption adopted by Congress covering distressed home mortgages, many owners can escape the ultimate double-whammy: Getting kicked while you're down, hit with extra taxes because your mortgage went seriously delinquent or you lost your house.

In its latest guidance, the IRS focuses on several key points that owners -- and former owners -- need to know. Tops on the list: Just because a lender wrote off a portion of your mortgage debt, this doesn't mean you automatically qualify for special tax treatment. To the contrary, there are essential tests you need to pass to qualify: The debt your lender canceled must have been used by you "to buy, build or substantially improve your principal residence." There's a lot packed into these words, so it's important to parse them carefully. Start with the house itself. It can't be your second home, an investment condo, a weekend retreat or a seasonal home you occupy for less than half the year. It can only be your main residence, and fully documentable as such.

Next, the unpaid mortgage balance your lender canceled as part of a modification, short sale or foreclosure cannot have been used for non-qualifying purposes, i.e, for something other than acquiring or constructing the house or making capital improvements to it. Refinanced mortgage debt used for kids' tuitions, vacations, buying cars or paying off credit card bills won't make the grade. The IRS offers a hypothetical example of how borrowers can mess up their chances for tax relief. A taxpayer took out a first mortgage of $800,000 when he purchased his home years ago. Thanks to strong appreciation in property values, the house was soon worth $1 million and the owner refinanced the mortgage to $850,000. The loan balance at the time of the refi was down to $740,000, and the owner used the $110,000 in cash-out proceeds to buy a new car and pay off credit card debts. Bad move. A year or two later -- presumably well into the recession and housing bust -- the home value had plunged to between $700,000 and $750,000. The owner then convinced his bank to allow a short sale for $735,000 and to cancel the remaining $115,000 of unpaid debt. Does the owner get tax relief on the full $115,000 under Congress' special exemption? No way, according to the IRS. He only escapes income taxes on just $5,000 of the $115,000 because he spent the other $110,000 on a car and credit card balances -- neither of which counts as "qualified principal residence" debt.

Greg A. Rosica, a tax partner with accounting giant Ernst & Young, says misunderstandings of the rules about mortgage debt forgiveness are "commonplace." People often don't know that "the equity line (money) you used for vacations" and other purposes "just will not qualify" under IRS rules. Taxpayers who walk away from their houses may be liable for taxes, said Rosica in an interview, if at some point the property "no longer was their primary residence" -- say they rented it out for the period between their last payment and the foreclosure -- effectively converting the house into rental property, not their principal home.

The IRS highlighted some other key points in its guidance: -- Mortgage cancellation relief is capped at $2 million for singles and married taxpayers, $1 million for married owners filing separately. -- Anyone who's had mortgage debt cancellation as part of a loan modification or foreclosure should go to IRS.gov and download Form 982 and IRS Publication 4681 for additional filing details. Alternatively they can call 800-TAX-FORM to request copies. Lenders who write off unpaid mortgage balances typically provide borrowers with a year-end IRS form 1099-C cancellation of debt statement, including the amount of the loan forgiven and the fair market value of the property. If you've had mortgage debt canceled but have never received a 1099-C from your lender, get in touch and request it if you want to avoid federal tax hassles.

A Colonial-style mansion on Long Island Sound that some say was the inspiration for parts of F. Scott Fitzgerald's "The Great Gatsby," a novel of Jay Gatsby's boom-and-bust 1920s, is set to be torn down and the land divided into several multi-million dollar home sites, according to stories in the New York Post and Newsday. After a rich social and literary history, Lands End - a once-grand 25-room mansion - is now dilapidated and empty. The property is along a stretch of shoreline called "The Gold Coast" where many once-grand gilded-age manses have fallen victim to tough economic times and have met the same fate as Lands End.

The owner of the house bought it in 2004 for $17.5 million and disputes claims that it was the inspiration for the novel, but says that it costs upwards of $4,000 a day to maintain the property.

Fitzgerald was born in St. Paul, where he lived for several years at various times. The stage version of "Gatsby" got its world premiere in Minneapolis in 2006 to commemorate the opening of the new Guthrie Theater building along the Mississippi River.

CoreLogic said today that the number of homeowners across the country who have a mortgage that's more than the value of their house rose slightly from 22.5 percent during the 3rd quarter 2010 to 23.1 percent by the end of the year.

In the Twin Cities metro area 16.8 percent, or 80,705, residential mortgages were in a negative equity position during the fourth quarter. Another 5.3 percent were in near negative equity in the Twin Cities, meaning that they were very close to owing more than their house was worth.

These negative equity reports, which are produced by several entities, have been somewhat controversial because it's a measure that only applies to homeowners who HAVE a mortgage, and it's only important if that person is planning to sell. At any given time, only about 5 percent of all homes are on the market.

Earlier this year Zillow sent a shudder through the local housing market when it said that 42 percent of all Twin Cities homeowners were underwater on their mortgages at the end of the year, significantly more than the 27 percent figure for the nation.

Though contractors are HUNGRY for work and you'll probably save on labor costs, several reports suggest that prices on construction materials of all sorts are rising. This afternoon the Associated General Contractors of America said that during January a broad index of construction materials rose 0.9 percent on top of a 4.9 percent increase over the previous 12 months. Prices are particularly high for diesel fuel and anything made with steel. A story in the Los Angeles Times details some of the issues. Was also a recent story by my colleague, Susan Feyder, about the issue in the Star Tribune.

A new quarterly survey says that while new home construction is still struggling, the remodeling market has hit bottom and is poised to improve during the coming year. Remodeling Magazine's Residential Remodeling Index, which ranks the top 100 hottest remodeling markets nationwide, says that the Twin Cities metro area was No. 3 overall in terms of remodeling activity during the third quarter 2010. Cincinatti and Houston topped the list.

The survey, which is based on building permit data and other information, suggests that remodeling activity has picked up significantly and is expected to grow during the coming year. That's not a surprise given the stagnant housing market. With sales falling many homeowners are optiong for fix-up projects instead of selling. Here's a link to the full report, which includes details on the 2011 forecast.